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Securities Alert

July 16, 2019

SEC and State Securities Administrators Release Joint Statement on Opportunity Zone Investments

By Erin Reeves McGinnis, Charles D. Vaughn, Michael K. Rafter, Gary M. Brown, Kay A. Gordon

On July 15, 2019, the SEC staff and the North American Securities Administrators Association (NASAA, a 50-state association of securities administrators) released a joint statement regarding the federal opportunity zone program (the Joint Statement).  This summary highlights various important considerations that sponsors of qualified opportunity funds, or QOFs, should consider.

The Joint Statement highlights that QOF sponsors should be aware of a variety of federal and state securities law implications when accepting investments.  The items highlighted by the SEC and NASAA include:

  • Interests in QOFs will typically be “securities.”  Because “security” has a broad definition under federal and state securities laws, interests in QOFs generally will constitute securities.  As a result, offers and sales of QOF interests must comply with securities laws, which require that the interests be registered with the SEC and applicable state authorities unless the interests are exempt from registration.  Also, even if exempt from registration, anti-fraud provisions of federal and state securities laws will nevertheless apply.
  • Exemptions may be available but are highly technical.  If not sold in a registered offering, offers and sales of securities must satisfy an exemption both at the federal and the state level.  The federal exemptions that may be available include:
    • Rule 506 of Regulation D, which contains two commonly used federal exemptions – one that prohibits “general solicitation,” Rule 506(b), and one that permits it, Rule 506(c).  Rule 506(b) requires a high level of disclosure to unaccredited investors, and Rule 506(c) prohibits sales to unaccredited investors.  Generally, accredited investors have income of at least $200,000 in each of the past two years and expect to meet that requirement in the current year, or they have a net worth of more than $1 million.  Rule 506-compliant offerings pre-empt state registration requirements but allow states to require notice filings and payment of nominal fees. 
    • The intrastate offering exemption, which exempts offerings limited to investors in a single state in which the issuer is located.  Although intrastate offerings remain subject to state regulation, many states have exemptions for offerings to a limited number of investors within the applicable state.  As a practical matter, however, these state exemptions may be too restrictive for QOFs looking for a broad investor base.
  • Broker registration may apply.  Individuals who solicit investments in QOFs may be deemed to be “brokers” and subject to registration requirements under federal and state securities laws.  “Broker” status is a “facts and circumstances” determination, and a variety of activities, including marketing a fund, identifying potential investors, and handling investor funds, may bring a person within the realm of being a broker.  Receipt of transaction-based compensation is also a strong indicator that an individual is acting as a broker.  There are limited exemptions from broker registration requirements.
  • QOFs may be “investment companies.”  Broadly speaking, an “investment company” is a company that is engaged primarily in the business of investing or trading in securities.  Investment companies are subject to regulation under the Investment Company Act of 1940.  While certain exclusions may be available, investment company regulation is complex and highly technical, and QOF sponsors should consult with counsel that regularly represents investment companies to determine whether an exemption applies, and if not, the implications of being an investment company.

Nelson Mullins attorneys have a breadth of experience with private securities offerings, including decades-long relationships with state securities administrators, and we are familiar with broker registration questions and investment company qualification considerations.  For more information regarding the QOF program and related securities law implications, contact your Nelson Mullins attorney or any of the other experienced Nelson Mullins attorneys listed to the right.